Buy side trading strategies
In the ten years since the original MiFID codified the best execution obligations of European Union-based investment firms, the expectations of regulators and investors have steadily risen. However, buyside monitoring of execution quality has not stood still, even if some best execution policies have gathered dust.
Multiple regulatory initiatives, market structure developments and disruptive technologies — not to mention the occasional scandal — have heaped attention on how investment ideas are implemented by buyside trading desks and how orders are executed by their sellside execution brokers. Meanwhile, regulators also made their feelings known. The Financial Conduct Authority issued a warning shot with its thematic review on best execution and payment for order flow, followed by a buyside-focused market study published last November.
In March, the UK watchdog said it would revisit best execution throughout , warning: Transaction cost analysis TCA has had to evolve as scrutiny of outcomes has intensified and market structure has become more complex, but to support best execution it is increasingly used alongside a wider range of inputs within a framework geared toward identifying and addressing the causes of under-performance.
For equities, Franklin Templeton conducts its own ex-post TCA in-house using data collected from brokers and trading venues, but also benchmarks performance via a peer analysis service from a third-party provider. The firm uses services from OTAS Technologies to source real-time inputs that could influence trading strategy selection during the order execution process, which ensures responsiveness to market conditions and militates against outliers. Franklin Templeton is also in the process of implementing a new multi-asset class execution management system EMS.
In an era of self-directed trading, buyside desks used TCA to demonstrate cost-effective implementation of investment ideas to end-investors. However, post-MiFID fragmentation of liquidity, diversification of trading venue models, and the development of smart order routers posed new questions.
TCA can tell the trader how an order performed against pre-trade expectations, but did that router miss out on the best price by accident or design?
And to experiment, you must have a framework that measures the impact of any changes or tweaks on trading outcomes. Genius is one percent inspiration and ninety-nine percent perspiration. I have my eye on a key reversal-line for selling-opportunities tomorrow morning. Our greatest weakness lies in giving up. The first 3 setups would be considered and the 4th would be either ignored or entered as a counter trend position with a lower lot size.
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